Estimating Romania’s potential GDP: a production function and multivariate approach

This research assesses Romania's potential GDP and its variances employing the production function methodology and a multivariate approach. The Cobb-Douglas function measures potential production by integrating labor, capital, and total factor productivity (TFP), utilizing Kalman filtering for labor and the perpetual inventory approach for capital. TFP trends are derived using the Hodrick-Prescott filter. A multivariate filter enhances potential GDP estimates by correlating output gaps with inflation, unemployment, and capacity utilization. Bayesian methodologies guarantee reliable parameter estimate. The results indicate cyclical variations, with recessions and crises exerting enduring impacts on potential output. Structural changes and EU entry foster long-term resilience, although inflation and labor dynamics are crucial factors. This work enhances the precision of potential GDP calculation in a growing economy by integrating various estimation methodologies. It presents empirical information regarding the enduring impacts of economic shocks and furnishes insights for policymakers in formulating efficient fiscal and monetary responses to macroeconomic volatility.